Extension of 'Dividend Policy, Growth, and the Valuation of Shares' by Miller and Modigliani (1961) to Allow for Share Repurchases

Abstract:     
Miller and Modigliani (1961) consider valuation of infinite horizon firms that may not engage in purchasing their own shares. While their fundamental valuation approach applies also to firms that purchase their own shares, their stream of dividends approach does not apply to a class of firms paying out “insufficient” dividends as characterized by a necessary and sufficient condition in this paper. The latter approach is modified so that it can be used for valuation of infinite horizon firms including those which may purchase their own shares. The modified approach is the natural extension of the traditional dividend stream approach used for valuing finite horizon firms. Moreover, it is proved to be equivalent to the fundamental valuation approach.

For related papers, see Sethi, When Does the Share Price Equal the Present Value of Future Dividends? A Modified Dividend Approach, Economic Theory, Vol. 8, No. 2, pp. 307-319, 1996 and Sethi, Derzko and Lehoczky, A Stochastic Extension of the Miller-Modigliani Framework, Mathematical Finance, Vol. 1, Issue 4, pp. 57-76, October 1991; also available on SSRN.

Number of Pages in PDF File: 12

Keywords: Miller and Modigliani Theory, MM theory, Valuation of firms, Dividend approach, Cash flow approach, Arbitrage, Infinite horizon firms, Share repurchase, Share price, Dividend policy, Finacial valuation

JEL Classification: D40, D46, G12, G31, G35, G3

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